Steffy: The collective delusion of oil abundance

Published 9:57 pm, Tuesday, March 27, 2012

Late last week, I filled up for $3.88 a gallon. Four days earlier, gasoline was 4 cents a gallon cheaper, and by this week, prices were inching toward the dreaded $4 a gallon threshold.

That would be painful in a normal year, but this is an election year, which means politicians are scrambling to turn rising pump prices to their political advantage.

"The price of gasoline is getting to the point where politicians are getting worried that they might have a hard time getting re-elected," said Art Berman, a Sugar Land energy consultant.

President Barack Obama recently hit the road to tout the energy ideas - let's not call them a "plan" - that he tossed out in the State of the Union speech in January. He's quick to note that domestic oil production rose 15 percent in the past two years, as if to head off the claims from his opponents that his policies are driving up gasoline prices.

Meanwhile, the oil industry claims that if it got its way - more drilling, fewer regulations and lower taxes - all problems would be solved.

It would, for example, be nice to believe that increasing production would solve our problems, but a recent statistical analysis by the Associated Press of monthly, inflation-adjusted gasoline prices and U.S. domestic oil production during the past 36 years found no correlation between production and pump prices.

That might explain why, despite the increased production that Obama touts, prices have continued to rise.

The much-ballyhooed increase in U.S. production simply isn't enough to have a meaningful effect on global oil prices, which doubled from 2005 to 2011, and the price of crude remains the biggest factor in retail gasoline prices.

Offsetting reductions

U.S. production gains look impressive, but they largely offset declines earlier in the decade from major hurricanes that disrupted offshore and Gulf Coast facilities. Domestic production, including natural gas liquids, was 7.5 million barrels a day in 2010, according to the Energy Information Administration, and that number probably increased to about 7.7 million barrels last year, estimates Jeffrey Brown, an independent petroleum geologist in Fort Worth who writes frequently on oil issues.

In 2004, before the spate of hurricanes, production was 7.2 million barrels. That means domestic production hasn't increased more than about 500,000 barrels a day despite the hydraulic fracturing binge and other efforts to encourage drilling. During the same period, the combined net exports from the seven largest exporters in the Americas - including Canada, Mexico andVenezuela, some of our biggest suppliers in this hemisphere - fell by 1.4 million barrels, or 23 percent, according to Brown's analysis.

Not realistic

While rising domestic production is certainly a benefit for the country, it won't meet our domestic demand. Consider that U.S. oil production peaked in 1970 at about 10 million barrels a day, yet our consumption, as of 2010, was about 19 million barrels, according to the EIA. We would have to more than double domestic production just to meet current demand. No amount of fracturing has come close to that sort of volume.

Meanwhile, China, India and other rapidly developing countries, whose oil imports are rising sharply, are increasingly competing for oil with countries like the U.S.

"So, while slowly increasing U.S. crude oil production is very important, the dominant trend we are seeing is that developed oil-importing countries like the U.S. are being gradually priced out of the global market for exported oil," Brown said.

Put another way, supply isn't rising fast enough to meet global demand, and that's why prices for both oil and gasoline are rising.

Politicians from both parties ignore the data and fan the delusions of newfound abundance. That's politically more appealing than the truth: The solutions to our conundrum are complicated, they'll take decades to achieve, and they aren't likely to get anyone elected this November.

Loren Steffy, loren.steffy@chron.com, is the Chronicle's business columnist. His commentary appears Sundays, Wednesdays and Fridays. Follow him online at blog.chron.com/lorensteffy, www.facebook.com/LorenSteffypage and twitter.com/lsteffy.